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The behavior of currencies during risk-off episodes

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  • De Bock, Reinout
  • de Carvalho Filho, Irineu

Abstract

Episodes of increased global risk aversion, also known as risk-off episodes, have become more frequent and severe since 2007. During these episodes, currency markets exhibit recurrent patterns, as the Japanese yen, Swiss franc, and U.S. dollar appreciate against other G-10 and emerging market currencies. The pattern of these moves can be explained by a combination of fundamental factors, such as the nominal interest rate, the international investment position and measures of exchange rate misalignment, and market-liquidity factors, such as bid-offer spreads and restrictions on international capital flows. We also find that currency performance in a risk-off episode has become more related to a currency's yield and relationship to broader risks in recent years.

Suggested Citation

  • De Bock, Reinout & de Carvalho Filho, Irineu, 2015. "The behavior of currencies during risk-off episodes," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 218-234.
  • Handle: RePEc:eee:jimfin:v:53:y:2015:i:c:p:218-234
    DOI: 10.1016/j.jimonfin.2014.12.009
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    Keywords

    Risk-off episodes; Exchange rates; Safe haven currencies;

    JEL classification:

    • F3 - International Economics - - International Finance

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